Asset classes definition

What is an asset class?

An asset class is a category of financial instrument - these can be physical assets or financial assets. The instruments are grouped into asset classes based on whether they show similar characteristics, behave in the same way on the market, or are governed by the same laws and regulations.

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To prevent the risk associated with focusing on one section of the market, many strategies recommend spreading trades out across a mix of assets. This is referred to as diversification (or diversifying). There is no guarantee that diversifying a portfolio will yield returns, but it may help reduce risk – if one asset class experiences a positive swing, it could outweigh the downward movement of another.

Examples of asset classes

Assets are grouped together based on their financial structure. The traditional four types of asset classes are:

  • Equities, also known as stocks, are the shares that make up the ownership of public companies. Within this asset class, there is further variation between large-cap, mid-cap and small-cap stocks
  • Fixed income assets are investments that pay interest over time and then return the original sum paid. Bonds are the most common type of fixed income asset
  • Money market assets are cash and cash equivalents. These are liquid assets, but they do not hold much room for growth. Forex is included in this class
  • Alternative investments include some very popular markets, like real estate and commodities, as well as cryptocurrencies

Many investors would put cryptocurrencies in their own asset class. In fact, there is no complete agreement on how many asset classes exist. Some people only identify three categories of assets - equities, fixed income and money market - while others use as many as five, which includes commodities and cryptocurrencies as their own classes.

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